Sen. Rand Paul on Newsmax criticized big government spending under the Biden administration, saying it would lead to inflationary pressures in the coming years.
Appearing Wednesday on "Eric Bolling: The Balance," the Kentucky Republican said: "We're looking at $7 [trillion] to $8 trillion worth of new debt. This is going to lead to price inflation. Nothing is free in life. When government comes to you and says, here's a free stimulus check, here's free college, here's free child care ... don't believe them. It's a bait and switch."
"The bait and switch is this: You're going to get something for free or what appears to be free, but your prices will rise,'' Paul said. ''And by the end of the year, you'll be no better off than you began with."
Paul went on to quote the British economist John Maynard Keynes: "If you create stimulus, it works."
"And he was asked, 'what about the long run if you print up all this money? Will it stimulate demand and cause a boom in the economy?"
"Yes," Keynes responded, according to Paul.
"We're in the midst of that'' now, Paul added. ''Creation of money works in the short run." But "when [Keynes] was asked what happens in the long run, he flippantly said, 'well, we'll all be dead.'"
According to a research paper from VOX EU, an economic publication, pandemics usually follow a trend. There is typically a slight uptick in inflation after the pandemic ends, followed by a substantial decline. After the substantial decline, a significant uptick occurs.
"Moreover," the research paper states, "the extent to which the pandemic affects inflation further depends on hysteresis effects, which leave permanent scars on the economy, and countries' ability to adjust to the post-pandemic economy."
The paper didn't mention a relationship between government spending and inflation.
But according to a tweet thread from Olivier Blanchard, MIT Fellow and Robert Solow Professor of Economics emeritus, the Biden stimulus wouldn't just lead to economic overheating — it would lead to an economic fire.
"Let me double down and go through some numbers," Blanchard tweeted in February. "I agree that too much is better than too little and we should aim for some overheating. The question is how much. Much too much is both possible and harmful. I think this package is too much."
"CARES added 900 billion of stimulus in December. The Biden proposal adds 1.9 trillion. The infrastructure program to come, will add more, but let's leave it aside. Adding the three numbers above gives: 3.6 trillion or 4 times the upper bound on the output gap."
"The term output gap," according to Investopedia, "refers to the difference between the actual output of an economy and the maximum potential output of an economy expressed as a percentage of [GDP]."
"If this increase in demand could be accommodated," Blanchard hypothesized, "it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero. This would not be overheating; it would be starting a fire."
"If it were to happen, it would lead to strong inflation (not the 2.5% that some predict, but potentially much more), and, likely a strong reaction of the Fed to limit the overheating, a very large increase in interest rates, again far more than is currently priced in."
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